What are Green Fuels?

Pexapark uses the term Green Fuels to cover the umbrella of definitions for hydrogen, ammonia and other hydrogen-derivatives produced from renewable energy derived from renewable energy sources such as wind and solar. These include RFNBO’s and other renewable definitions. We might use renewable hydrogen or ammonia interchangeably with Green Fuels.

RFNBO’s (Renewable Fuels of Non-Biological Origin) is the definition provided by the EU Commission through the Renewable Energy Directive (RED) for what constitutes hydrogen, hydrogen-based fuels or other energy carriers produced from renewable energy sources other than biomass. Gaseous renewable hydrogen produced by feeding renewables-based electricity into an electrolyser is therefore considered an RFNBO. At the same time, liquid fuels, such as ammonia, methanol or e-fuels, are considered RFNBOs when produced from renewable hydrogen.

The green fuels market is in its infancy, with little or no transactions for spot or long-term offtake agreements. The green fuels market will follow a similar trajectory to the PPA market with long-term agreements closed to enable non-recourse project finance. They will be highly structured and be linked to the pay-as-produced PPA market due to RFNBO (renewable fuels from non-biological origin) regulatory requirements.

Pexapark publishes renewable hydrogen & ammonia prices using Pexapark’s PaP PPA prices as input costs ensuring these are deemed RFNBO compliant. The renewable hydrogen and ammonia prices follow a market-based approach to understand the price of green fuels on a marginal basis, not taking OPEX or CAPEX into account, following the equation below. In layman terms, Pexapark GFP represents the market price for green hydrogen and ammonia if a green fuel contract was signed today, with delivery on the stated start date, based on the input cost of electricity from an PPA compliant with EU RFNBO rules, while accounting for the financial risk of the PPA oversizing relative to the electrolyser size.

Please follow the EU Commission’s Q&A for further information: EU Delegated Acts on Renewable Hydrogen (europa.eu)

Green fuel prices = P(PPA) *𝜂 + Δ (risk)
P(PPA) = Market price of a pay-as-produced PPA
𝜂 = conversion factor into hydrogen or ammonia
Δ = value of PPA shed

Pexapark defines capacity ratio as the ratio between size of renewable asset producing electricity, in MW, to electrolyser size. A capacity ratio of 1, for example, would represent a 10 MW onshore wind farm connected to a 10 MW electrolyser.

Given the relatively low number of full-load-hours (FLHs), a 1:1 capacity ratio between electricity-producing asset and electrolyser would result in an uneconomically low load factor of the electrolyser. It is for this reason that projects will oversize the capacity of the renewable asset. Oversizing will increase the number of hours where the electrolyser operates at capacity, however, at the expense of power input overshooting capacity at times. Choosing the capacity of PPA contracts to supply an electrolyser project is therefore all about optimizing the trade-off between underutilization on the low end of capacities and excessive load shedding (i.e. reselling excess power deliveries into the market).

The part of aggregate monthly PPA volumes which have to be sold into the spot market due to electrolyser saturation. This is a function of the capacity ratio between PPA contracts and electrolyser as well as the statistics of hourly loads.

i) with increasing capacity ratio, larger fractions of PPA volumes will have to be resold into the grid
ii) the larger the cost of the renewable hydrogen due to the cost of dealing with the shedded volumes. Pexapark determines the capture factor and volumes shedded.

Grey Prices displayed on the graph of green fuel prices are Methane-based production prices for the fuel, including the cost of carbon emission.

Green spreads are the price spreads between (i) grey fuel prices and (ii) green fuel prices, i.e. the price premium of grey fuels over green fuels. Spread benchmarks measure the price differential between green and grey fuels. Negative spreads correspond to green fuels being more expensive than grey fuels, whereas spreads show positive, when green fuels are cheaper than grey fuels.